Monday, November 3, 2008

Economic Effect of a Cap and Trade System

What is the economic effect of a cap and trade system for carbon dioxide?

Let's say natural gas trades at a premium to coal at the current time to produce the same amount of power and natural gas produces less carbon dioxide for that amount of power. The effect of the cap and trade system that imposes a fee on each emission of carbon dioxide is to: (a) increase demand for natural gas and (b) reduce demand for coal. A similar effect occurs to the extent that natural gas produces less carbon dioxide than oil.

Now who benefits from a cap and trade system. Those who have large investments in natural gas or alternative fuels. From a political standpoint, an aggressive cap and trade system may benefit Pennsylvania to the extent that Pennsylvania will become a major natural gas producer in the future as a result of the Marcellus Share Resorvior. Thus, even though coal has been a major contributor to the PA economy, the new reality is that Pennsylvania probably benefits as much as any state from a cap and trade system to the extent that my theory is correct and natural gas replaces oil and coal.

I believe major Obama supporters such as Warren Buffet and Bill Gates have major investments in natural gas. Presumably, a cap and trade system vastly boosts the value of their natural gas holdings. Google, which has several Obama supporters, is making major investments in alternative energy. Energy costs are a major concern for Google. A cap and trade system may benefit Google by raising energy prices for potential competitors. Anyway, these businesses and investors aren't supporting Obama out of concern for the poor. There is a lot of profit to be made as a result of a cap and trade system.

It won't help coal miners and coal towns which will be devastated by this system. It won't help individuals and businesses which will pay much higher energy costs. But it will provide additional money to those who will generate the most benefit from cap and trade, which is those who produce the fuel that creates the lower carbon dioxide emissions per the BTUs produced. For them, the higher the tax on carbon emissions, the more money they can make.

Will a cap and trade system help spur alternative energy sources such as solar, wind, etc? It depends on how high the tax on carbon emissions is.

Do I think a cap and trade system is good? If it is used as a tax raising device as appears to be the proposal by President-Elect Obama, then I don't think it will work well. It will probably make the cost of manufacturing prohibitive in many parts of the country.

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